Weaker-than-expected U.S. factory activity and fears of a slowdown in China from a bruising trade war have heightened investor expectations the Federal Reserve will not raise rates in 2019, and possibly even cut them in 2020.

Global equities have had a weak start to the new year and U.S. bond yields have fallen sharply on rising bets economic activity could brake sharply across the world this year.

"The biggest beneficiary in such a gloomy scenario would be the yen," said Ray Attrill, head of currency strategy at NAB.

The yen rose marginally to 107.55 per dollar in early Asian trade, after gaining 1.1 percent the previous session on the back of risk-off positioning. The Japanese currency has gained 3.5 percent in the last seven sessions.

Data on Thursday showed U.S. manufacturing activity slowed sharply to a two-year low in December. A plunge in new orders and hiring at factories suggested the economy was not immune to slowing growth in China and Europe.

Earlier this week, markets were rattled by Apple Inc's cut in its sales forecast and dismal manufacturing data out of China.

Spooked by signs of fresh troubles in the world's largest economy, investors rushed to the safety of bonds. U.S. two-year Treasury note yield dropped below 2.4 percent on Thursday, reaching parity with the federal funds effective rate for the first time since 2008.

The market move suggests investors believe the U.S. central bank will not be able to continue to tighten monetary policy as its forecast suggests.

The Fed raised rates four times in 2018 on the back of strong growth momentum and a robust labour market. However, with financial conditions tightening, most analysts now do not expect the Fed to raise rates in 2019.

In an interview with Bloomberg on Thursday, Dallas Fed President Robert Kaplan acknowledged issues such as the deceleration of global growth, tightening of financial conditions and widening credit spreads.

"My own view is we shouldn't take any further action on interest rates until these issues are resolved for better or for worse...," Kaplan said. "So I would be an advocate of taking no action during the first couple of quarters of this year...we should be patient and give some time for this economy and watch how this situation unfolds."

A dovish Fed would likely keep the greenback under pressure in the coming months.

"A weaker dollar should benefit emerging market currencies, but for now they are hamstrung by all the uncertainty around China," NAB's Attrill added.

The dollar index was marginally lower at 96.3. The index fell 0.56 percent in the previous session.

The euro and sterling were unchanged from Thursday's close at $1.1391 and $1.2627, respectively. (Editing by Jacqueline Wong)